Kazakhstan s Revealed Comparative Advantage Vis-À-Vis the EU-27

Transcription

1 ECIPE Working Paper Kazakhstan s Revealed Comparative Advantage Vis-À-Vis the EU-7 Arastou Khatibi Arastou Khatibi (arastou.khatibi@ecipe.org) is a Research Associate of ECIPE. He is also a PhD student and teaching assistant at the Department of Economics at the Catholic University of Louvain (UCL). Abstract Economic trade relations between Kazakhstan and the EU are becoming increasingly important, and much of this economic success is due to its rich energy resources and the government s efforts in restructuring its centrally planned economy towards a more free-market based economy. In spite of these achievements a number of challenges remain to be dealt with, and one of the most important is diversifying the economy. This paper aims to examine Kazakhstan s competitiveness vis-à-vis world exports to the EU-7 and intra-exports between the EU-7 member countries. The empirical analysis is based on Balassa s revealed comparative advantage (RCA) measure. The analysis reveals that although Kazakhstan shows a revealed comparative advantage in a number of sectors, its competitiveness has a falling trend in almost all sectors. JEL Code: Keywords: C; F1; F13; P0 Kazakhstan-EU trade relation; Revealed comparative advantage; competitiveness info@ecipe.org Rue Belliard 4-6, 40 Brussels, Belgium Phone +3 (0)

2 1. Introduction* Economic trade relations between Kazakhstan and the EU are becoming increasingly important. Indeed, bilateral trade between the two rose to 19 billion euros (0.7 % of total EU-7 trade) in 006, compared to 14 billion euros (0. % of total EU-7 trade) in Much of Kazakhstan s economic success is due to its rich energy resources and the government s efforts in restructuring its centrally planned economy towards a more free-market based economy. However, in spite of these achievements a number of challenges remain to be dealt with if Kazakhstan wishes to maintain its present economic growth. Among these challenges one of the most important is diversifying the economy. The Kazakh economy is currently heavily dependent on its energy resources, with its mineral fuels accounting for more than 80 per cent of exports. This paper aims to examine Kazakhstan s relative competitiveness and compare the structure of specialization in trade vis-à-vis world exports to the EU-7 and exports within the EU-7 member countries. The empirical analysis is based on Balassa s (1965) revealed comparative advantage (RCA) index. The rest of the paper is structured as follows. To provide background for the analysis, an overview of Kazakhstan s export and import structure is presented briefly in Section. In Section 3 indices of revealed comparative advantage are developed to examine Kazakhstan s RCA with respect to world exports into the EU-7 and with the EU-7 member countries. In addition, Section 4 examines Kazakhstan s comparative advantage over time to see if Kazakhstan s competitiveness is increasing or decreasing. Conclusions are included in Section 5. * I wish to thank Lucy Davis for her helpful contribution to this paper. * The ECIPE Working Paper series presents ongoing research and work in progress. These Working Papers might therefore present preliminary results that have not been subject to the usual review process for ECIPE publications. We welcome feedback and recommend you to send comments directly to the author(s).

3 . Kazakhstan s trade structure in general Table 1: Percentage share of Kazakhstan s commodity trade vis-à-vis the EU-7 (in %) Food and Live Animals Beverages and Tobacco Crude Materials Minerals and Fuels Animal and Vegetable Oil Chemical Products Basic Manufactures Machines, Transport Equipment Miscellaneous Manufactures Goods not Classified by Kind EXPORTS IMPORTS Source: Calculation based on EUROSTAT data Table 1 illustrates the structure of Kazakhstan s trade by presenting industry s share with respect to total trade. As evident from Table 1, the most noticeable element is the dominance of minerals and fuel in the share of exports. Its share of 51 percent in total in 1999 has been increasing steadily, accounting for 83 per cent in 006. Indeed, oil has been the driving force of economic development over the past decade in Kazakhstan. Basic manufacturing (mainly metals) is the second most important industry to have contributed in the development of Kazakhstan s export structure. Although still important, the share of basic manufacturing in exports has been declining since At the aggregate level, Kazakhstan s exports are still heavily dominated by minerals and fuels, while the majority of imports, in particular machinery and transport equipment, generate more than a half of the total imports. 3

4 3. Kazakhstan s Revealed comparative advantage This section looks at how Economic trade theory advances two explanations of comparative advantage. The first is the Ricardian theory that attributes comparative advantage to technological differences across nations, and the second, the Hecksher-Ohlin (H-O) theory that states that comparative advantage results from cost differences which are determined by a countries relative factor scarcity. To measure the comparative advantage, Balassa (1965) suggested that comparative advantage could be revealed by observed trade patterns that reflect differences in factor endowments across nations. Balassa constructed an index that measures a country s revealed comparative advantage (RCA). Based on Balassa (1965) and Benedicts & Tamberi (001), two measures of competitive advantage are developed. The first index (RCA 1 ) aims to measure Kazakhstan s exports advantage with respect to world exports into the EU-7. Formally the index is presented as RCA i 1 = X kzi X wi (1) X kz X w where, RCA i 1 denotes revealed comparative advantage index of Kazakhstan s industry i to the EU- 7, X kzi is Kazakh exports to the EU-7 in industry i, X wi is world industry i s exports to the EU-7; X kz indicates total Kazakh exports to the EU-7, and X wi is the world exports to the EU-7. The second index (RCA ) captures Kazakhstan s comparative advantage with respect to intra-eu trade, i e trade between member states. This is expressed as follows: RCA i = X kzi (X kzi + X EU-7i ) X kz (X kz + X EU-7 ) where, RCA i denotes a revealed comparative advantage index of Kazakhstan s industry i with respect to EU-7 member countries, X EU-7i is the intra EU export between member state industry i, and X EU-7 indicates total intra-eu exports within Europe. The reasoning behind the two measures is simple. The RCA i index for example, compares the share of Kazakhstan industry s i trade 1 with the share of the same industry in world exports to the EU-7. The index reveals that Kazakhstan has a comparative disadvantage in sector i with respect to world exporters if 0 < RCA i1 <1, while it has a comparative advantage in sector i if RCA i1 >1. In other words, when RCA i1 >1, then (X kzi / X kz ) > (X / wi X ); so Kazakhstan s share of industry i is grater than the same sectoral share w of world exports. 1 The present analysis is based on the annual time series data on EU-7 exports and imports, compiled by EUROSTAT. The data have been collected at 3-digit Standard International Trade Classification (SITC) over the period 1999 to 006. Tables 3 and 4 in the appendix present all the computations for indices RCA 1 and RCA respectively at -digit SITC level of aggregation. An overall examination of both indices reveals that Kazakhstan has a comparative advantage in five sectors, namely in food and live animals (1-digit SITC code 0), crude materials (SITC code ), energy (SITC code 3), chemical products (SITC code 5) and manufactured goods (SITC code 6). Table presents a closer look (at 3-digit level) of the sectors in which Kazakhstan has a revealed comparative advantage. As can be seen, Kazakhstan s comparative advantage is in the energy sector and manufacturing of goods such as inorganic chemicals, iron, steel and non-ferrous metals. () 4

5 Table : Sectors that reveal comparative advantage SITC Sectors in which Kazakhstan has a comparative advantage in both indices RCA 1 & RCA 04 CEREALS AND CEREAL PREPARATIONS 041 WHEAT (INCLUDING SPELT) AND MESLIN, UNMILLED 043 BARLEY, UNMILLED 1 HIDES, SKINS AND FURSKINS, RAW 11 HIDES AND SKINS (EXCEPT FURSKINS), RAW 6 TEXTILE FIBRES AND THEIR WASTES 61 SILK 63 COTTON 8 METALLIFEROUS ORES AND METAL SCRAP 8 FERROUS WASTE AND SCRAP; REMELTING SCRAP INGOTS OF IRON OR STEEL 86 URANIUM OR THORIUM ORES AND CONCENTRATES 3 COAL, COKE AND BRIQUETTES 31 COAL, WHETHER OR NOT PULVERIZED, BUT NOT AGGLOMERATED 33 PETROLEUM, PETROLEUM PRODUCTS 333 PETROLEUM OILS AND OILS OBTAINED FROM BITUMINOUS MINERALS, CRUDE 34 GAS, NATURAL AND MANUFACTURED 34 LIQUEFIED PROPANE AND BUTANE 43 NATURAL GAS, WHETHER OR NOT LIQUEFIED 344 PETROLEUM GASES AND OTHER GASEOUS HYDROCARBONS, N.E.S. 5 INORGANIC CHEMICALS 5 INORGANIC CHEMICAL ELEMENTS, OXIDES AND HALOGEN SALTS 54 OTHER INORGANIC CHEMICALS; ORGANIC AND INORGANIC COMPOUNDS OF PRECIOUS METALS 55 RADIOACTIVE AND ASSOCIATED MATERIALS 67 IRON AND STEEL 671 PIG-IRON, SPIEGELEISEN, SPONGE IRON, IRON OR STEEL GRANULES AND POWDERS AND FERRO-ALLOYS 68 NON FERROUS METALS 681 SILVER, PLATINUM AND OTHER METALS OF THE PLATINUM GROUP 68 COPPER 685 LEAD 686 ZINC 689 MISCELLANEOUS NON FERROUS METALS SITC Sectors in which Kazakhstan presents a comparative advantage for index rca 67 IRON AND STEEL 673 FLAT-ROLLED PRODUCTS OF IRON OR NON-ALLOY STEEL, NOT CLAD, PLATED OR COATED 674 FLAT-ROLLED PRODUCTS OF IRON OR NON-ALLOY STEEL, CLAD, PLATED OR COATED Source: Calculation based on EUROSTAT data. Although a static view of Kazakhstan s comparative advantage seems to be good, a different picture emerges when looking at how the competitiveness has evolved since The next section aims at showing how the different sectors have evolved over time. 3. Changing trend of Kazakhstan s Revealed comparative advantage This section takes a look at how the sectors for which Kazakhstan has a comparative advantage have evolved since Figure 1 plots the RCA 1 index over time. A very similar result is obtained by using the RCA index. For the sake of simplicity they are not presented in this paper. A glance at 5

6 Figure 1 reveals that Kazakhstan s competitiveness over time has a falling trend for all commodities except cotton (3 digit SITC 63) and for some miscellaneous non-ferrous based metals (code 689) for which the revealed comparative advantage has slightly improved since As a result Figure 1 hints towards a weak competitiveness of Kazakh exports to the European markets in the future. Figure 1: Changing trends of Revealed comparative advantage over time for index rca 1 Food and Live Animals (SITC Code - 0) Crude Materials, Expect Fuels (SITC Code - ) RCA 8 RCA WHEAT (INCLUDING SPELT) AND MESLIN, UNMILLED BARLEY, UNMILLED 11 - HIDES AND SKINS (EXCEPT FURSKINS), RAW 63 - COTTON 8 - FERROUS WASTE AND SCRAP; REMELTING SCRAP INGOTS OF IRON OR STEEL 86 - URANIUM OR THORIUM ORES AND CONCENTRATES Energy (SITC Code - 3) Chemical Products (SITC Code - 5) RCA 8 RCA COAL, WHETHER OR NOT PULVERIZED, BUT NOT AGGLOMERATED PETROLEUM OILS AND OILS OBTAINED FROM BITUMINOUS MINERALS, CRUDE 5 - INORGANIC CHEMICAL ELEMENTS, OXIDES AND HALOGEN SALTS 34 - LIQUEFIED PROPANE AND BUTANE 54 - OTHER INORGANIC CHEMICALS; ORGANIC AND INORGANIC COMPOUNDS OF PRECIOUS METALS PETROLEUM GASES AND OTHER GASEOUS HYDROCARBONS, N.E.S RADIOACTIVE AND ASSOCIATED MATERIALS Manufactured Goods Classified by Material (I) (SITC Code -6) Manufactured Goods Classified by Material (II) (SITC Code - 6) RCA RCA SILVER, PLATINUM AND OTHER METALS OF THE PLATINUM GROUP PIG-IRON, SPIEGELEISEN, SPONGE IRON, IRON OR STEEL GRANULES AND POWDERS AND FERRO-ALLOYS FLAT-ROLLED PRODUCTS OF IRON OR NON-ALLOY STEEL, NOT CLAD, PLATED OR COATED FLAT-ROLLED PRODUCTS OF IRON OR NON-ALLOY STEEL, CLAD, PLATED OR COATED 68 - COPPER LEAD MISCELLANEOUS NON-FERROUS BASE METALS EMPLOYED IN METALLURGY, AND CERMETS 6

7 4. Conclusion An analysis of the competitiveness of Kazakhstan with respect to world exports into the EU-7 and the member countries have been presented based on the Balassa index of revealed competitive advantage and calculated for the period 1990 to 006. Both evaluations of the RCA indices revealed the same findings, that Kazakhstan is competitive in several sectors, mainly in energy and manufactured goods. However, a more pessimistic view is revealed when examining Kazakhstan s competitiveness over time. The results suggest that the competitiveness of Kazakhstan has decreased significantly over the past few years. This being said, Kazakhstan obviously retains a comparative advantage in the energy and mineral sectors, and mineral fuels account for over 80 % of exports, as was seen at the start of the paper. Kazakhstan therefore appears to be trading in the right way, so to speak, and exploiting this relative advantage well with regards to the EU, in spite of an overall decline in competitiveness. Oil and minerals have been the driving force of Kazakhstan s economic development over the past decade and a half. However, the dominance of this sector in the economy has been a major cause of concern to the Kazakh government in the past decade, which has cited over-dependence and a desire for economic diversification. As part of their overall economic growth strategy, the government has in recent years been focused on building up it s manufacturing sector in particular. The results of this study suggest that this has not been successful and, in terms of future policy recommendations, the Kazakh government may do well to turn their attention to other areas of the economy, or indeed to put their energy into continuing the process of liberalization to which they have stated a commitment since independence in the 1990s. It may be one of the oldest economic debates, but the extent to which a government can manipulate comparative advantage is the core of the issue here, as Kazakhstan continues its path away from planned economy towards greater integration into global markets. And while this study has been limited to the EU and is obviously not a complete picture of Kazakhstan s total trade with the rest of the world, it should prompt further investigation in order to shed light on just how successful the government s diversification strategy has been to date and where they should go from here. 7

8 5. Appendix Table 3: Revealed comparative advantage of Kazakhstan using index rca 1 (at digit-sitc level of aggregation) SITC Code 0 FOOD AND LIVE ANIMALS MEAT AND MEAT PREPARATIONS DAIRY PRODUCTS AND BIRDS' EGGS FISH CRUSTACEANS, MOLLUSCS CEREALS AND CEREAL PREPARATIONS VEGETABLES AND FRUIT SUGARS, MOLASSES AND HONEY FEEDING STUFF FOR ANIMALS MISCELLANEOUS EDIBLE PRODUCTS AND PREPARATIONS BEVERAGES AND TOBACCO BEVERAGES TOBACCO CRUDE MATERIALS, EXCEPT FUELS HIDES, SKINS AND FURSKINS, RAW OIL SEEDS AND OLEAGINOUS FRUITS CRUDE RUBBER CORK AND WOOD PULP AND WASTE PAPER TEXTILE FIBRES AND THEIR WASTES CRUDE FERTILIZERS METALLIFEROUS ORES AND METAL SCRAP CRUDE ANIMAL AND VEGETABLE MATERI- ALS, N.E.S ENERGY COAL, COKE AND BRIQUETTES PETROLEUM, PETROLEUM PRODUCTS GAS, NATURAL AND MANUFACTURED ELECTRIC CURRENT CONFIDENTIAL TRADE OF GROUP 39 AND/OR ESTIMATIONS OILS, FATS AND WAXES ANIMAL OILS AND FATS FIXED VEGETABLE FATS AND OILS, CRUDE ANIMAL OR VEGETABLE FATS AND OILS, WAXES ADJUSTMENTS CHEMICALS PRODUCTS ORGANIC CHEMICALS INORGANIC CHEMICALS DYEING, TANNING AND COLOURING MATERIALS 54 MEDICINAL AND PHARMACEUTICAL PRODUCTS 55 ESSENTIAL OILS, PERFUME MATERIALS, COSMETICS FERTILIZERS

9 57 PLASTICS IN PRIMARY FORMS PLASTICS IN NON PRIMARY FORMS CHEMICAL MATERIALS AND PRODUCTS, N.E.S. 6 MANUFACTURED GOODS CLASSIFIED BY MATERIAL 61 LEATHER MANUFACTURES, DRESSED FURSKINS RUBBER MANUFACTURES CORK AND WOOD MANUFACTURES PAPER, PAPERBOARD AND ARTICLES THEREOF 65 TEXTILE YARN, FABRICS, AND RELATED PRODUCTS NON METALLIC MINERAL MANUFACTURES IRON AND STEEL NON FERROUS METALS MANUFACTURES OF METALS MACHINERY AND TRANSPORT EQUIP- MENT 71 POWER GENERATING MACHINERY AND EQUIPMENT 7 MACHINERY SPECIALIZED FOR PARTI- CULAR INDUSTRIES METALWORKING MACHINERY GENERAL INDUSTRIAL MACHINERY AND EQUIPMENT OFFICE MACHINES AND COMPUTERS TELECOMMUNICATION, SOUND, TV, VIDEO ELECTRICAL MACHINERY ROAD VEHICLES OTHER TRANSPORT EQUIPMENT MISCELLANEOUS MANUFACTURED ARTICLES 81 PREFABR. BUILDINGS; SANITARY, HEATING, LIGHTING FURNITURE, BEDDING, MATTRESSES TRAVEL GOODS, HANDBAGS AND SIMILAR GOODS 84 ARTICLES OF APPAREL AND CLOTHING ACCESSORIES FOOTWEAR PROFESSIONAL, SCIENTIFIC AND CON- TROLLING MATERIAL 88 PHOTOGRAPHIC APPARATUS AND OPTI- CAL GOODS, CLOCKS MISCELLANEOUS MANUFACTURED ARTICLES NOT CLASSIFIED ELSEWHERE Source: Calculation based on EUROSTAT data. Notes: Scores greater than unity (RCA > 1 ) reveal a comparative advantage, while scores less than unity (0 RCA <1) reveal a comparative disadvantage. Sectors that reveal a comparative advantage are written in bold numbers. 9

10 Table 4: Revealed comparative advantage of Kazakhstan using index rca (at digit-sitc level of aggregation) SITC Code 0 FOOD AND LIVE ANIMALS MEAT AND MEAT PREPARATIONS DAIRY PRODUCTS AND BIRDS' EGGS FISH CRUSTACEANS, MOLLUSCS CEREALS AND CEREAL PREPARATIONS VEGETABLES AND FRUIT SUGARS, MOLASSES AND HONEY FEEDING STUFF FOR ANIMALS MISCELLANEOUS EDIBLE PRODUCTS AND PREPARATIONS BEVERAGES AND TOBACCO BEVERAGES TOBACCO CRUDE MATERIALS, EXCEPT FUELS HIDES, SKINS AND FURSKINS, RAW OIL SEEDS AND OLEAGINOUS FRUITS CRUDE RUBBER CORK AND WOOD PULP AND WASTE PAPER TEXTILE FIBRES AND THEIR WASTES CRUDE FERTILIZERS METALLIFEROUS ORES AND METAL SCRAP 9 CRUDE ANIMAL AND VEGETABLE MATE- RIALS, N.E.S ENERGY COAL, COKE AND BRIQUETTES PETROLEUM, PETROLEUM PRODUCTS GAS, NATURAL AND MANUFACTURED ELECTRIC CURRENT CONFIDENTIAL TRADE OF GROUP 39 AND/OR ESTIMATIONS OILS, FATS AND WAXES ANIMAL OILS AND FATS FIXED VEGETABLE FATS AND OILS, CRUDE 43 ANIMAL OR VEGETABLE FATS AND OILS, WAXES ADJUSTMENTS CHEMICALS PRODUCTS ORGANIC CHEMICALS INORGANIC CHEMICALS DYEING, TANNING AND COLOURING MATERIALS 54 MEDICINAL AND PHARMACEUTICAL PRODUCTS 55 ESSENTIAL OILS, PERFUME MATERIALS, COSMETICS FERTILIZERS PLASTICS IN PRIMARY FORMS

11 58 PLASTICS IN NON PRIMARY FORMS CHEMICAL MATERIALS AND PRODUCTS, N.E.S. 6 MANUFACTURED GOODS CLASSIFIED BY MATERIAL 61 LEATHER MANUFACTURES, DRESSED FURSKINS RUBBER MANUFACTURES CORK AND WOOD MANUFACTURES PAPER, PAPERBOARD AND ARTICLES THEREOF 65 TEXTILE YARN, FABRICS, AND RELATED PRODUCTS 66 NON METALLIC MINERAL MANUFAC- TURES IRON AND STEEL NON FERROUS METALS MANUFACTURES OF METALS MACHINERY AND TRANSPORT EQUIPMENT 71 POWER GENERATING MACHINERY AND EQUIPMENT 7 MACHINERY SPECIALIZED FOR PARTI- CULAR INDUSTRIES METALWORKING MACHINERY GENERAL INDUSTRIAL MACHINERY AND EQUIPMENT OFFICE MACHINES AND COMPUTERS TELECOMMUNICATION, SOUND, TV, VIDEO ELECTRICAL MACHINERY ROAD VEHICLES OTHER TRANSPORT EQUIPMENT MISCELLANEOUS MANUFACTURED ARTICLES 81 PREFABR. BUILDINGS; SANITARY, HEATING, LIGHTING FURNITURE, BEDDING, MATTRESSES TRAVEL GOODS, HANDBAGS AND SIMILAR GOODS 84 ARTICLES OF APPAREL AND CLOTHING ACCESSORIES FOOTWEAR PROFESSIONAL, SCIENTIFIC AND CONTROLLING MATERIAL 88 PHOTOGRAPHIC APPARATUS AND OPTICAL GOODS, CLOCKS MISCELLANEOUS MANUFACTURED ARTICLES NOT CLASSIFIED ELSEWHE- RE Source: Calculation based on EUROSTAT data. Notes: Scores greater than unity (RCA > 1) reveal a comparative advantage, while scores less than unity (0 RCA < 1) reveal a comparative disadvantage. Sectors that reveal a comparative advantage are written in bold numbers. 11

12 6. References Balassa, B (1965), Trade liberalization and revealed comparative advantage. Manchester School of Economics and Social Studies, vol 33, pp Embassy of the Republic of Kazakhstan (007), Kazakhstan : economic overview. London, <www. kazakhstanembassy.org.uk/cgi-bin/index/65>. European Commission (008), Kazakhstan. Brussels: External relations, < external_relations/kazakhstan/intro/index.htm>. Inka, H & Pemasiri, G (003), Analysing comparative advantage and competitiveness : an application to Australia s textile and clothing tndustries. Australian Economic Papers, vol 4, pp 3-117, 003. Benedictis, Luca De & Tamberi, Massimo (001), A note on the Balassa index of revealed comparative advantage. Florence: European University Institute/Ancona; Università di Ancona (Working Paper), Available from: < Utkulu, U & Seymen, D (004), Revealed comparative advantage and competitiveness : evidence for Turkey vis-à-vis the EU-15. European Trade Study Group (ETSG). Paper presented at the ETSG annual conference, 004. Endnotes 1. Another way of interpreting the index is by rearranging equation (1) so that it can be expressed as follow: 1 X RCA i = kz i X kz X w i X w which is defined by Kazakhstan s share of world exports in industry i (X kz i /X wi ) divided by its share of total world exports to the EU-7. So Kazakhstan reveals a comparative advantage in industry i when RCA i 1 > 1, that is whenever (X kzi /X wi ) > (X kz /X w ) In other words, Kazakhstan reveals a comparative advantage when its share of world exports in industry i is grater than the share of total world exports. More detail of the index can be found in Benedictis & Tamberi (001). 1